MUMBAI: States’ consolidated gross fiscal deficit increased to 3.3 per cent of gross domestic product (GDP) in 2024-25, after remaining below 3.0 per cent during the previous three consecutive years, Reserve Bank’s annual publication “State Finances: A Study of Budgets” noted.
The deficit of States exceeding 3 per cent mainly reflects 50-year interest-free loans from the Centre under the Special Assistance to States for Capital Investment, which is over and above the States’ normal borrowing ceiling.
For 2025-26, States have budgeted gross fiscal deficit at 3.3 per cent of GDP while improving the composition of spending by restraining revenue expenditure.
The RBI report noted that the consolidated outstanding liabilities of States declined to 23.1 per cent of GDP at end-March 2024, from a peak of 31 per cent at end-March 2021. The improvement reflects both fiscal consolidation efforts and favourable debt dynamics, the central bank said in the report published this week.
The outstanding liabilities are budgeted to increase to 29.2 per cent of GDP by end-March 2026.
“Notwithstanding elevated debt levels, indicators of debt sustainability remain favourable,” RBI asserted. The RBI report further noted that states in India are at different stages of demographic transition and their demographic profiles are increasingly influencing their finances.
“The youthful States have a wider window of opportunity, benefiting from expanding working age population and stronger revenue mobilisation.
In contrast, the window is getting narrower for the ageing States, facing fiscal pressure arising out of shrinking tax base and rising obligations from committed expenditure,” the RBI report noted.
Going forward, RBI noted that youthful States may harness their demographic dividend by strengthening human capital investment, intermediate States may balance growth priorities with early preparation for ageing, and ageing States may enhance revenue capacity alongside healthcare, pension and workforce policy reforms.
The Reserve Bank’s annual publication “State Finances: A Study of Budgets” provides a comprehensive analysis of the fiscal position of State governments in India for the period 2023-24 (actuals) to 2025-26 (budget estimates). The theme of this year’s Report was ‘Demographic Transition in India – Implications for State Finances’.
